Iraq’s new oil minister makes the right noises

Iraq’s new oil minister makes the right noises

September 5, 2016

But he is on less sure ground when talking about locating new refineries

For some time now I have refrained from commenting on the oil and gas scene in Iraq because the state of the industry is not really encouraging and change is very hard to come by. But, now, a new minister is at the helm and fresh announcements made.

I feel obliged to use this column to send a message of congratulations to Jabbar Al Luaibi and to wish him well in his attempt to revitalise the industry.

He grew with the industry and therefore there is so much more expected of him in comparison with his predecessors.

But one should also be critical. While it is understandable for the minister to renew commitments to raise Iraq’s crude oil production, the downstream has received its share of announcements and that deserves comments.

The “Downstream Middle East and Africa Monitor” said: “Jabbar Al Luaibi promised to breathe life into the government’s moribund plan for a major expansion of refinery capacity by inviting investment in four new greenfield refineries.”

But for many reasons, Iraq has failed to attract such investments since 2009 though it improved on the incentives. The ministry should at least consider other options of financing if it cannot do so from own budget. Interest rates are low and project financing is now easier than ever.

The situation in the refineries has not changed much since 2003, where capacity utilisation hovered between 60 to 70 per cent at best. And product qualities have stayed at the lowest level in the region. This forced Iraq to import up to 2014 between 90,000 to 100,000 barrels a day (kbd) of expensive light petroleum products.

The starting point should be to raise the capacity utilisation rate whatever it takes.

Damage

While the available refinery capacity now is close to 590,000 barrels a day, in the first half of 2016, utilisation is just over 400,000 bd. In the corresponding period of 2014, before Daesh, the available capacity was close to 900,000 bd, with utilisation at 575,000 bd.

The catastrophic loss of Baiji refining complex — due to its occupation by Daesh — and the many battles and indiscriminate shelling to retake the refinery must have inflicted great damage. Looting of equipment and materials from the refinery will make repairs even more expensive and difficult.

Therefore, it is surprising that Baiji is absent from the minister’s statements, whereas it is vital to commit the ministry to the repair of its only sophisticated and large capacity plant.

It is not surprising then when the minister “estimated the deficit between refined product supply and demand at an optimistic 200,000 bpd”.

Energy strategy

The billions spent on product imports since 2003 could have doubled or trebled Iraq refining capacity, maintained its plants and improved the quality of products. When will Iraq realise this?

But the more worrying in the latest statements relates to the new refineries being announced, which are a deviation of both the plan of 2010 and the national energy strategy adopted later. It called for four new refineries at Karbala, Meesan, Naseriya and Kirkuk. But now we also have Kut (100,000 bd) and Samawa (70,000 bd) without any clear study or justification for this fragmentation of resources.

Kut is already supplied by a product pipeline and Samawa has a 30,000 bd refinery which is supposed, like all small refineries, to be phased out by 2019.

Large and complex refineries do not attract private investors and therefore the minister’s announcement that negotiation with “technically-qualified companies in early September over plans to develop new refineries with combined capacity of 420,000-470,000 barrels per day in Basra in the south, Kirkuk in the north, and in Kut and Samawa” is likely to see the same fate.

Dubious investor

Millions were spent on the original plan, but only Karbala moved ahead on the ministry’s budget and not on private investment. I was hoping that the minister will announce a major rethinking of the location of Meesan refinery, which was awarded to a dubious investor with no resources or previous experience and turned out to be just a post office box in Switzerland.

So much was written about this that everybody believed the project would be cancelled.

Refineries should not follow oilfields but centres of consumption and over the ease of moving the products to markets. None of Meesan, Kut and Kirkuk fill this requirements.

Iraqi refineries should expand only in Basra, Naseriya, Baghdad, Baiji and — may be — later on further north in Mosul. This is the refinery axis which follows product pipelines and centres of consumption.

The minister’s statement that he would “work day and night” to expand refining of “oil products that are directly useful to the services provided to the people” is absolutely welcome. But let this effort be on a solid foundation, technical and economy and not on local politics.